The Bank of England’s monetary policy committee was split six against three in its vote to cut interest rates to 5 per cent this month, minutes of the meeting showed on Wednesday.
UK Daily View
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Andrew Sentance and Tim Besley, often seen as the committee’s most hawkish members, wanted to keep rates steady at 5.25 per cent while David Blanchflower, consistently dovish, voted for a bigger cut of 50 basis points.
The division surprised economists, who had expected all members to favour lower rates, and the pound strengthened briefly as investors further pared back expectations of rapid policy easing.
“There appears to be a split emerging between those members focusing very closely on the near-term inflation outlook ... and those prepared to think more about the implications of the weakening activity outlook for inflation further ahead,” said Jonathan Loynes, at Capital Economics.
However, all members agreed interest rates would need to fall further. Those voting for unchanged rates argued that a premature cut might make the MPC look more worried about the housing market and domestic demand than about hitting the medium term inflation target.
They would have preferred to wait until the Bank’s next Inflation Report, when it could communicate its thinking more fully, but still thought it “likely . . . that Bank Rate would need to be reduced at a measured pace.”
“It wasn’t the direction of rates that was the issue,” said Richard McGuire, strategist at RBC Capital Markets. “The concern was as to whether they frontload or backload the adjustment.”
Most members felt the quarter point cut was warranted to prevent an excessive slowdown that could send inflation below target in the medium term. They also felt it was consistent with market expectations of gradual easing, and reduced the risk of an unexpectedly sharp slowdown later on, requiring a more vigorous response.
Even among the majority, however, there were mixed views on how far the balance of risks to the inflation target had changed since the Bank issued its last set of forecasts in February.
Some thought the risks of inflation undershooting target in the medium term had increased but others, given”the increase in prospective near-term inflation”, felt the issue was less clear.
Evidence of the split on the MPC emerged as the British Bankers’ Association said that mortgage approvals fell to the lowest in more than a decade in March.
Banks granted 35,417 loans for house purchase, the fewest since records began in September 1997 and down 46 per cent from March last year. The monthly figure, which is also down 18 per cent from February, comes as banks have been withdrawing mortgage offers for borrowers because of rising rates in the wholesale money markets.
